Avi-Yonah sums up the problems with McCain’s expensing proposal…
McCain’s Expensing Idea Revisited: Still A Massive Tax Shelter»
Our guest blogger is Reuven S. Avi-Yonah, the Irwin I. Cohn Professor of Law at University of Michigan Law School.
For a while, Senator John McCain has been advocating letting corporations expense (currently deduct) the cost of purchasing business equipment. This is touted as a way of helping the economy, despite the lack of any evidence that it would do so.
Sen. McCain’s original proposal involved open ended expensing with no limitations. As I pointed out in an earlier paper, this proposal would not only “bust the budget” because of its direct cost, but it would also open the door to an immense increase in tax sheltering.
That is because corporations could borrow funds and use these funds to buy business equipment. The whole amount of the investment would be immediately deductible, as would the interest on the loan. The deductions would be larger than the size of the investment, generating extra deductions that could shield other income from taxes. Tax lawyers call this a “negative tax rate” and it is similar to the shelters that proliferated before the 1986 Tax Reform Act.
Sen. McCain has recently revised his proposal in the face of such criticism. He now proposes to limit expensing to equipment purchased between 2009 and 2013 and to limit the deduction of interest on loans incurred to purchase such equipment.
More importantly, the revised proposal is still open to massive tax sheltering. Limitations on interest deductibility have proven unworkable because money is fungible. If interest on loans incurred to finance business equipment purchases cannot be deducted, corporations would borrow to fund other expenditures and use the money freed up that way to buy the equipment.
Sen. McCain’s revised proposal will not work either. There is no evidence it will help the economy, the budgetary cost would still be significant, and the anti-tax shelters provision would just add complexity without deterring the shelters. This whole proposal is wrong-headed and should simply be scrapped.